Severance Packages: Best Practices for Employee Exits

A severance package is the combined pay, services and benefits employers sometimes offer employees upon termination. HR leaders look at multiple factors when severing ties with employees and offering severance packages. It’s important to know how it serves your business interests. One of the most strategic components of a severance package is outplacement services. A good package that includes outplacement services creates goodwill and can turn ex-employees into employee alumni who continue to promote your brand. Additionally, a good package may reduce the threat of legal challenges. Outplacement as a risk mitigation tactic is strongly advised in view of recent court decisions favoring employees who brought suit against their employers even after signing severance agreement releases.

Legal Conditions that Compel Severance Packages

According to FindLaw, employers are only legally obligated to offer employees a severance agreement in two situations:

  1. In some states, employers must provide a severance offer when terminations are the result of closing a facility or drastically reducing payroll.
  2. If employers led employees to believe they would offer a severance package, they might have to provide one. Employees often have a case for receiving funds when they can provide a written severance contract, mention of severance in the employee handbook, a history of offering severance packages in similar instances, or even a conversation in which severance was promised.

Business Reasons to Offer Severance Packages

If employees leave with some extra funds, benefits, and well wishes, they are more likely to say good things about your organization – to co-workers and customers. Even when they’re not legally obligated, employers have strategic reasons to often offer some type of package, so they can:

  1. Preserve the remaining workforce’s morale. Severance shows your remaining staff that they are working for an ethical and compassionate employer that would treat them well if they were laid off. Such a gesture is important when you rely on your remaining employees’ loyalty, especially during difficult times.
  2. Protect the company’s brand and reputation. Branding is an important business issue. A disgruntled employee can enact a huge toll on both b2b and b2c businesses. The act of providing severance aligns with the branding of an ethical company – one that others want to do business with or work for.
  3. Mitigate the threat of legal action. A primary benefit of offering severance is the protection from lawsuits, because the offered severance benefits are conditioned upon the signature of an agreement to release the employer from any legal claims. In essence, the employee waives their right to take legal action against the employer and seek penalties or damages.

Severance Agreements Lessen, Not Eliminate, Potential for Legal Action

Courts in recent years have not let severance agreements stand in the way when employees pursued certain legal claims. In fact, they have judged that “the tender back rule,” which forms the legal basis for the employer’s protection, does not apply under the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act, or the Equal Pay Act.

What is the tender back rule? The tender back rule, which applies to all types of release agreements, is the premise that, if you take the money that was tendered, you can’t change your mind and sue, unless you give the money back. In many cases, the person is unwilling or unable to return the cash, and the agreement remains in force.

However, in August of 2018, the United States Court of Appeal for the Sixth Circuit ruled that the tender back doctrine does not apply to claims brought under Title VII or the Equal Pay Act. The Court wanted to ensure cash-strapped, unemployed persons who had legitimate legal claims stemming from practices of any law-breaking employers would have the ability to take their claims to court. (See of Jenna McClellan v. Midwest Machining, Inc.). And previously, in 1998, the Supreme Court heard the case of Oubre vs Entergy and found the tender back rule inapplicable to claims brought under the Age Discrimination in Employment Act (ADEA).

What Makes a “Good” Severance Package?

Joel Peterson (chairman of JetBlue and adjunct professor at Stanford University’s Graduate School of Business) writes in the Harvard Business Review, “Failing to treat a fired employee graciously can also come back to hurt the business: Some industries are small, and the person you’re firing today may work for a customer or a supplier tomorrow. Particularly in knowledge-intensive industries, relationships with ex-employees are valuable.”

Peterson is among the many experts who agree that outplacement is part of a good severance strategy. According to Peterson, “A good package should contain (a) financial severance, (b) professional outplacement assistance, (c) specific information about compensation for vacation pay and other earned benefits, (d) specific information on continuing health insurance, (e) a plan for providing references, (f) an agreed-upon internal and external communication plan (ideally, one that allows for a resignation rather than an official firing), and (g) the signing of a legal release.”

The Strategic Value of Outplacement in Your Severance Package

Outplacement services help employees move on sooner and put the past behind them. In fact, employers offer outplacement for the same reasons they offer severance packages: It preserves workforce morale, protects the employer’s brand, and mitigates legal risk.

Because hiring today is a much more sophisticated, technology-enabled process, successful job search requires more specialized skills. More than just applying for jobs online, the candidate must learn to market herself online. That’s because so many of today’s recruiters and hiring managers are viewing online profiles and resumes of people who haven’t even applied, but whom they consider qualified. They seek out candidates as much or even more than they sift through incoming applications and resumes.

Your former employees may become quickly frustrated as they look for employment on their own. A quality outplacement program matches job seekers with a capable job search coach, who can help them navigate the digital landscape and build an online “brand.”

Without outplacement services, former employees may be more likely to suffer long-term unemployment. If they can’t move forward, they are likely to look back and blame their former employer, whether or not they have a legitimate legal claim. It can be argued that offering outplacement, because it helps people become employed faster, is a protection against frivolous claims.

Outplacement services include:

  • Help with creating a personal brand, which includes an online profile, resume, and cover letters.
  • Personalized coaching and job search advice.
  • Interview training utilizing mock, video-recorded sessions.
  • Career assessments.
  • A technology platform that helps the candidate search for openings and apply for jobs online.

Think Strategically About Severance & Outplacement

Traditionally, employers that offer outplacement will bundle it into the severance package, thinking it will sweeten the lure of the offering. However, experts disagree. Very few people who engage in outplacement refuse to sign agreements. And if they do, your outplacement provider is likely willing to give you a full or partial refund. The best approach is to encourage the departing employee to engage with outplacement and a career coach. This gets them moving forward toward their next job and income as soon as possible.

An employee who is actively engaged in finding a new job is much more likely to focus on their future. The financial consideration in the severance agreement – and actual progress toward a new job – are separate, independent, and powerful motivators to put any past grievances aside.

In light of the COVID-19 crisis, it may be time to ensure that your severance program serves your business interests and aligns with your company’s core values. Outplacement is a strong component of any risk mitigation strategy. (If you are creating or updating your severance policy, you’ll also want to consult with a labor attorney for specific legal advice.)

For more information or to discuss your strategy, contact IMPACT Group. IMPACT Group has long been providing employers with outplacement services that deliver value – to both the employer and employee.